Time

The amount of time that is necessary to develop the Preliminary Specification is wholly dependent on the producers within the oil and gas industry. The need for the investors in the oil and gas industry to apply the pressure and compel the producers to develop this product in a timely manner is the priority that I am working on. When the opportunity costs are at $67 billion per year, and we have many years ahead of us, it is imperative that we begin as soon as possible. And right now we are not progressing in terms of the further development of the Preliminary Specification.

There are other developments that need to occur as well. The development of service providers and the organization of their service offering will need to be designed and developed during the next few years. The relationship with the service industry is impacted as well by the Preliminary Specification. In short there is a lot to do to address the issues in the industry and reorganize for the future of a dynamic and innovative oil and gas industry.

These are the time issues that we have to deal with. If it was just a time constraint based on software development deliverables the timelines would be estimable. Unfortunately these are not the critical points that will impede the development of the industry towards the changes to use of the Preliminary Specification. The changes that need to be undertaken by those within the industry will be the impediment to timely deliverables. However, what we are doing is moving closer, and by that I mean very close, to the cultural norm of the industry. People will be able to logically determine the location of an item when the Joint Operating Committee is the key organizational construct of the innovative and profitable oil and gas producer. It should therefore take less effort and time to make the changes noted above.

And these are big changes. No one has ever reorganized an industry, or two. The industry faces a critical decision. Either it must change or it will not prosper. And it has shown no capacity to change. No capacity to create a vision for the future. No capacity to even identify the issues that it is facing. It has stagnated for decades and this is proof that it will not change to address the demanding and difficult future. If we are calculating the opportunity costs of natural gas price declines in a decade then we’ll know that muddling along is the only strategy of the oil and gas bureaucracy.

I see things differently. To attempt this a decade ago would have been a failure. Both technically and from a business point of view. The technical risks have been mitigated since then. The business risks are still present, however, they are far more prevalent on the producer side if they don’t act. It is time that the industry considers the need to implement an Information Technology architecture and software development capability that will serve it for the next three decades. That is the Preliminary Specification and People, Ideas & Objects.

The Preliminary Specification provides the oil and gas investor with the business model for profitable oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Natural Gas Issues and Vested Pensions

These last few posts have allowed us to soar with the eagles and present the scope of the issues the oil and gas industry faces today. With Friday’s discussion of $64.7 billion in opportunity costs, and yesterday’s topic of revolutionary change, who could be against this project? The bureaucracy is standing in the way and is doing all that it can to ensure that it does not proceed. But let’s take it from their point of view, $64.7 billion in opportunity costs and revolutionary opportunities is nothing that should concern them. Their pensions are vested. They earn a decent if not spectacular salary that provides them with the opportunity to do everything they can think they want to do. The work that they do piles up on the left hand side of the desk in the morning. And in the afternoon it is collected from the bin on the right hand side of the desk. All is well and the only concern they have is with talk of doing things in different ways.

If the bureaucracy was asked to live off their pension as an alternative to dealing with the issues that are prevalent in the oil and gas industry, they would. Its only that they aren’t being asked to deal with these issues, and the game is still pretty easy so they’ll hang around before they shift to their pensions. I think “milking it for all its worth” is the appropriate term. After the natural gas prices were down for two years you would think there was some serious discussion as to the issue and possibly some discussion as to a solution. However, not a word. In what way is this acceptable? Let me be clear this is not by accident that its happening. Everyone knows that there’s overproduction. This is deliberate willful neglect.

But on the other hand what should we expect. We know that bureaucracies are leaderless. And its leadership that we need. The solution provided by the Preliminary Specification is the only solution that is offered in the marketplace. It enables the innovative and profitable oil and gas producer to remove their marginal oil and gas production from the marketplace through a variety of interfaces within the software. The first is the Marginal Production Threshold Interface. It allows the members of the Joint Operating Committee, who hold the operational decision authority, to make the decision to suspend production when the costs exceed the prices being realized.

The other aspects of the Preliminary Specification that make it the ideal choice for the market, where shale reservoirs are as prolific as they are, is in its use of the Decentralized Production Model. By stripping the producer firm down to the C class executives, the earth science and engineering resources, some support and legal staff. And organizing the remaining resources in service providers who are focused on processes across the industry. We can take advantage of the specialization and division of labor to make those processes as efficient and effective as possible. Then as the production, revenue and royalty accounting and lease rental and other processes are incurred by those service providers the charges for those services are charged directly to the Joint Operating Committee that the asset belongs to. That way when there is a time when the marginal cost exceeds the price realized and the partnership decides to suspend production then the overhead charges from the service providers are not incurred.

You can hear the bureaucracy screaming with indignation. My attitude towards them is similar to their attitude towards the issues in the industry. I don’t care. Their opportunity to offer solutions and deal with the problems has expired and as they say “they blew it.” They don’t have much credibility if you ask me. So I’ll continue on and I’m sure they will keep collecting that salary for a few more months, knowing that their future is set with their vested pensions.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

A Revolutionary Business Model

When we think of the many ways in which Information Technology has revolutionized the oil and gas industry. Well actually I can’t think of any changes to the ways that the industry has operated in the time that I have worked in the industry. There may be more iPads around and there are certainly greater volumes of data. And lets not forget about the volumes of paper. But in terms of how Information Technology has revolutionized the oil and gas industry there really hasn’t been any significant impact in terms of the ways and means of the industries operation.

What we do is faster, more timely and more accurate as a result of IT. And we may be able to conduct more analysis and deeper thought as to the cause and effect of certain actions. But just as we did in the 1940’s and 1950’s, we get out of bed and report to work at 8:00 for the same companies as yesterday, and conduct very similar, albeit more specialized jobs. At no time could anyone point to me when IT had such an impact on the effect of the industry that everyone would agree that “in 1978 when the PX798 was introduced” was when we really changed as an industry. So the sum total of the impact of IT in oil and gas has been a slow and casual improvement in the quality of information, but that’s it. Nothing more.

I say that because I think that the impact of IT on the oil and gas industry is about to have a dramatic effect. The Preliminary Specifications business model will be revolutionary in terms of the ways and means of oil and gas operations. Providing the oil and gas producer with the most profitable means of oil and gas operations is the key for the oil and gas investor, however, everyone in the industry is impacted as significantly. Focusing on the Joint Operating Committee aligns all of the resources of the industry on its legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks. Moving the compliance and governance frameworks of the hierarchy into alignment with the Joint Operating Committee makes the industry operate in a more natural manner than the current business model promoted by the bureaucracy. Muddling along doesn’t provide the value generation for anyone in the industry. Value that the industry should be providing for all of its stakeholders. Its time for a revolution.

There are significant changes that occur as a result of implementing the Preliminary Specification. Some will look at those changes and say that it is too radical to contemplate. But can we afford to continue on with the way that we are operating today? IT is providing an opportunity to implement a business model that moves closer to the cultural norm of the industry. If that is too radical then we are really stuck with the status quo. And if the status quo is having difficulty with the current industry situation, how will it deal with the future of the oil and gas industry? One in which the demands and expectations could be substantially higher.

I am biased of course, but I think that the Preliminary Specification will be looked upon as revolutionary in terms of its impact on the evolution of the oil and gas industry. Taking it from a sleepy go with the flow type of industry. To an industry that is dynamic and innovative, that generates value and efficiency to the world economy. That is what I think the opportunity is that is before us. And it is that change that we need to make, because if we don’t, there are bigger issues at stake.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

The Opportunity Costs of Natural Gas Prices

In this post we want to compare the two business models, the bureaucracies muddling along vs People, Ideas & Objects Preliminary Specification, in terms of the opportunity costs that are incurred by not having the Preliminary Specification operational. This calculation will be to determine what the opportunity costs would be for North American natural gas revenues assuming that producers were able to reduce production by ten percent and therefore raise the price of gas to $5.50 per MCF. Recall that the Preliminary Specification enables producers to shut-in production of marginal gas without incurring the penalty of production or overhead costs.

Currently natural gas production in North America is 78 Billion Cubic Feet (BCF) Per Day. That’s 78 x 365 days = 28.47 Trillion Cubic Feet (TCF) of gas for the year. We need to reduce this volume by ten percent to 25.88 TCF. With an estimated price of gas at $5.50, less an estimated average $3.00 realized per Thousand Cubic Feet (MCF) for 2012 leaves $2.50 of unrealized opportunity costs. Therefore the opportunity costs of 2012 natural gas prices is $2.50 x 25.88 TCF = $64.7 billion. A number larger than the costs to fund the Preliminary Specification.

The bureaucracy doesn’t need this money as they are adequately funded by the oil prices. However, the investors are entitled to this value nonetheless. It will require some work and effort, both to build and make the changes in the industry as a result of the Preliminary Specification. Work that the bureaucracy is not oriented towards. It’s not that the type of work is different to the work that the bureaucracy is familiar to, its that the bureaucracy is not that familiar to work itself. This situation has been with us now for a number of years. There is no proposed solution to its resolution. With the high costs of shale gas, and natural gas in general, this is not a situation that can continue. Yet the bureaucracy continues with no discussion of any possible resolution or even identification that this is an issue.

The fact of the matter is that the Preliminary Specification is new and not that well known in the marketplace, yet. The bureaucracy are not challenged by it as it is not seen by the marketplace as an alternative due to its relative newness. As we progress the bureaucracy will have a more difficult time in continuing on with their status quo do nothingness. I don’t expect that any solution to the over production will come about as a result of the bureaucracies handling of the situation in the next few years. There just not that smart and they are leaderless.

What the Preliminary Specification does is adopt the Decentralized Production Model. By doing so, all of the overhead costs are incurred by service providers who are organized based on a specialization and division of labor across the industry. That way they can organize their service offering based on the most efficient and effective process possible. These service providers then charge the Joint Operating Committee directly for their costs of production, revenue, royalty accounting or lease rental expenses, etc. Then when production is shut-in there is no service offering to be billed for the month and the overhead costs for the shut-in production doesn’t exist. Eliminating the High Throughput Production Model that the industry operates under today. Shut-in production therefore has no production costs or overhead costs incurred and therefore only the costs of capital are uncovered during periods when the production is shut-in. A producer can shut-in any production that does not meet the marginal costs and save those reserves for when the prices provide a return on investment. A much more rational way to approach the oil and gas industry during times when the shale formations are as prolific as they are. During times when production is shut-in producers can innovate and bring their costs down in their non-producing properties to bring those reserves back on production.

The irrational way in which the bureaucracy is producing oil and gas today is going to be looked upon as foolish in the near future. With so much potential reserves the bureaucracy seems to think that means it can be wasted. I think we should take the responsibility for producing those reserves out of the hands of the bureaucracy and put it in the hands of the investors and have it done profitably and responsibly through the Preliminary Specification.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

2012 Earnings Season

We are at the beginning of the 2012 earnings season. I am hoping this will be a crucial point in People, Ideas & Objects history. A time when our ability to demonstrate our business model’s value meets with the investors demand for greater earnings from the producer firms. If, as I suspect, that 2012 was a bad year for the oil and gas producers. Maybe this will be the point that the investors will begin to look for answers to the problems of the producers poor performance.

We have been running a balance of those producers who have announced their 2012 earnings. To date we have recorded only Encana’s spectacular loss of $2.79 billion. We have two other firms to add to that total and they are ARC Resource earnings of $139.2 million and Marathon Oil earnings of $1.582 billion. This gives a net total for the industry of $1.07 billion of losses for 2012.

The next two weeks we will see the balance of the firms report results. As I said, I hope that it is a turning point in the attitudes of the investment community towards the bureaucracies lack of performance. And our opportunity to demonstrate the differences between People, Ideas & Objects Preliminary Specification and the status quo.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Capabilities are the Results of Innovations

Now that we have finished reviewing the Research & Capabilities module we are going to take a short break from reviewing the Preliminary Specification to cover off some of the other aspects of this blogs discussion. I want to leave the Research & Capabilities with this last thought based on this quotation from Professor Richard Langlois.

The first, and most obvious, point is that it was an outside individual, not an organization, who was responsible for the reorganization of the industry. Lazonick is right in saying that genuine innovation involves reorganizing or planning (which may not be the same thing) the horizontal and vertical division of labor. But it was not in this case “organizational capabilities” that brought the reorganization about. It was an individual and not at all a “collective” vision, one that, however carefully thought out, was a cognitive leap beyond the existing paradigm. If SMH came to possess organizational capabilities, as it surely did, those capabilities were the result, not the cause, of the innovation. p. 46

It is that last sentence that stands out for me. That the information contained within the Dynamic Capabilities Interface would be the result of the innovations that were developed by the producer. Certainly there will be other capabilities that are listed within the interface but the key capabilities will be those that are developed as a result of the innovations that are developed by the firm.

The Preliminary Specification is designed to define and support the innovative oil and gas producer. It is an inherent part of the business model that People, Ideas & Objects are offering the oil and gas industry. A business model that provides the oil and gas producer with the most profitable and innovative means of oil and gas operations. Based on the Joint Operating Committee, the legal, financial, operational decision making, cultural, communication, innovation and strategic frameworks of the industry.

Contrast our business model with the one that the current bureaucracy are providing. One in which muddling along is the manner in which we approach the operational concerns. Is this how we address the future of the industry in this difficult energy era we are approaching? Our first step to addressing the future is to organize for it. And the first step in this advanced society is to build the software to define that organization. That is the objective here at People, Ideas & Objects and the Preliminary Specification is the design for the innovative and profitable oil and gas industry.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Two Primary Processes of Innovation

We have been discussing the coordination of operations and how that is organized in the People, Ideas & Objects Research & Capabilities module. Coordination of operations is only one of the things that is carried out in the module, innovation is another. To refresh our memory, the primary process in which innovation is carried out in the Preliminary Specification is as follows.

The producer firm through its interactions with the service industry develops new and innovative capabilities that are captured and documented in the “Dynamic Capabilities Interface.” The interactions with the service industry are through a variety of interfaces in both the Research & Capabilities and Resource Marketplace modules. Using the football analogy this is the practice field where the team is developing new and innovative plays to be worked on and perfected before game day. Game day is when the capabilities are published in the “Dynamic Capabilities Interface” which enables them to be seen in all of the pertinent Joint Operating Committees that the producer has an interest in. This process enables the producer firm to eliminate the unnecessary “trial and error” learning from being repeated in each and every Joint Operating Committee. The learning can be done once, and therefore limit the cost of the innovation by reducing the unnecessary experimentation. As I stated this is the primary process of innovation.

If there was a secondary or optional process of innovation in the Research & Capabilities module it would be based on the following. This is from Professor Richard Langlois’ paper “Innovation Process and Industrial Districts.”

Innovation is based on the generation, diffusion, and use of new knowledge. p. 1

Opportunities do occur at times and in places that are not planned for. Innovation is something that frequently falls within this description.

While it is possible to conceive of a firm that is so hermetic in its use of knowledge that all stages of innovation, including the combination of old and new knowledge, rely exclusively on internal sources, in practice most innovations involving products or processes of even modest complexity entail combining knowledge that derives, directly or indirectly, from several sources. Knowledge generation, therefore, must be accompanied by effective mechanisms for knowledge diffusion and for "indigenizing" knowledge originally developed in other contexts and for other purposes so that it meets a new need. p. 1

To preclude the opportunities for these types of discoveries to be acted upon would leave the spontaneity out of the oil and gas industry. When faced with the knowledge that is provided to the user of the “Dynamic Capabilities Interface” some things may become obvious that were not so before. Serendipity is a word that is used in economics quite frequently. We should adopt it here to ensure that a dynamic and innovative nature of the industry is the result.

But there is more that we are doing in this secondary process then we have done in the first process. We are building on the already well established capabilities of the producer firms of the Joint Operating Committees, and, we are exposing the collective knowledge to the broader community of earth scientists and engineers of the Joint Operating Committee. This broadening of the scope of users is at the same time there is limiting of the focus to just that Joint Operating Committee. Professor Langlois notes.

When accompanied by close social relationships, tight geographical proximity may affect innovation in ways that are less common in more highly dispersed environments. For example, an awareness of common problems can encourage several firms, or their suppliers and customers, to seek solutions, leading to multiple results that can be tested competitively in the market. pp. 1- 2

and

Relationships within industrial districts therefore lead to diffusion but also to the creation of new knowledge through shared preoccupations. Because many people or firms can work on a problem simultaneously, a number of different solutions may be found (Bellandi, 2003b). The results is a larger and stronger "gene pool" within the sector (Loasby, 1990, 117), with the further advantage that solutions that are originally regarded as competing may turn out to be complementary and well-suited to different niches within the district.  p. 7

What is therefore needed is a means to capture innovations that arise from this secondary process. Turn them into the primary innovation process so that they can be further populated throughout the various Joint Operating Committees that the firm participates in. That will limit the amount of trial and error learning costs that might occur if each Joint Operating Committee were to field test their own innovations based on the ideas they heard from so and so.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Management and the Former Soviet Union

In the Preliminary Research Report (2004) I suggested that the oil and gas industry was not fundamentally different than the former Soviet Union in terms of its ways and means. Going through the motions and determining “best practices” shows a state of stagnation that is very close to death, in my opinion. We see the natural gas prices that everyone watches but no one does anything about. Everyone complains about the service industry, but no one does anything about it. The market system hasn’t existed in the oil and gas industry for so long, no one even knows what it would look like. From Professor Richard Langlois book “The Dynamics of Industrial Capitalism” chapter 1.

The question, then, is clear: why did managerial coordination supersede the price system? Why did “managerial capitalism” supersede “market capitalism” in many important sectors of the American economy beginning in the late nineteenth century? p. 9

To reinstate the market and the dynamism of the market system in the oil and gas industry will require new systems to identify and support innovative producers, suppliers and Joint Operating Committees. The Research & Capabilities module is designed to enable the systemic thinking that is necessary for the earth science and engineering capabilities of the producer and Joint Operating Committees to act in dynamic, innovative and market fashion.

The parallel of the current system to the former Soviet Union is striking when you realize the pervasiveness of the non-thinking environment. From Professor Langlois’ “Economic Institutions and the Boundaries of the Firm: The Case of Business Groups.”

Indeed, traditional command-style economies, such as that of the former USSR, appear to be able only to mimic those tasks that market economies have performed before; they are unable to set up and execute original tasks. The [Soviet] system has been particularly effective when the central priorities involve catching up, for then the problems of knowing what to do, when and how to do it, and whether it was properly done, are solved by reference to a working model, by exploiting what Gerschenkron . . . called the “advantage of backwardness.” ... Accompanying these advantages are shortcomings, inherent in the nature of the system. When the system pursues a few priority objectives, regardless of sacrifices or losses in lower priority areas, those ultimately responsible cannot know whether the success was worth achieving. The central authorities lack the information and physical capability to monitor all important costs—in particular opportunity costs—yet they are the only ones, given the logic of the system, with a true interest in knowing such costs. (Ericson, 1991, p. 21).

The opportunity costs realized in the natural gas business are horrendous. It is well within the scope of understanding of everyone within the natural gas business as to what the difficulties are, yet no solutions are discussed. If not for the Preliminary Specification there would be no solutions whatsoever. Including the market orientation into all aspects of the oil & gas and service industries are key components of the Preliminary Specification.

And in terms of the status quo that management continue to pursue. This is the one culture of the industry that we are moving against. It is also the most powerful. Management control the budget and have exercised it by not supporting People, Ideas & Objects. Show me an ERP system with the depth of research into oil and gas that the Preliminary Specification has, well there are none. They all get financed on relationships with maintaining the status-quo with management. The fact that there has been no funding proves that management are too conflicted to do the right thing in this regard. Therefore the decision to proceed will have to be taken out of management’s hands and put in the hands of the investors and the C class executives to make the decision to fund People, Ideas & Objects. After all they have some concerns with management as well.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

Technologies Role in Societies Demand for Energy

Lets go back a bit to look at the “Dynamic Capabilities Interface”of the Research & Capabilities module from a different perspective. One in which we are looking more high level at the attributes of what we are attempting to achieve. With this perspective it should be possible to see how the Preliminary Specification relies on the dynamic marketplace of the service industry, and defines and supports the framework to execute field operations with military precision. This seemingly inherent contradiction is anything but. The two are fundamentally different with the field operations being a temporary snapshot of the marketplace’s offerings. Once that operation is complete, that temporary organizational construct developed for the field operations and its capabilities will never exist again. That is not to suggest that the capabilities are deleted from the “Dynamic Capabilities Interface,” it's just that they do not exist in the organization that was used for that specific field operation.

We want to maintain all of the elements of a dynamic and innovative service industry. The Preliminary Specification has set out to provide for this by ensuring the service industry receives strong support from the oil and gas industry. This is also necessary for the energy industry to ensure that the demands of society, in terms of energy, are met. Once this financial marketplace recession is over the demand for energy will resume a steady pace. We have discussed Professors Anthony Giddens and Wanda Orlikowski theory of Structuration and model of Structuration. That people, society and organizations must move together or there will be failure. It should be asked if these societal demands for energy can be met by the current oil and gas organizations? Technology can have a role in this. From Professor Orlikowski’s paper.

Interaction with technology influences the institutional property of an organization, and this influence is more likely to be reinforcing rather than a transforming one. (p. 235 The Duality of Technology: Rethinking the Concept of Technology in Organization). 

In order to achieve the organizational performance necessary to meet society's demands, it will require the technologies to be put in place first. This was one of the key findings of the Preliminary Research Report. This same theme is picked up by Professor Richard Langlois in his paper “The Vanishing Hand: The Changing Dynamics of Industrial Capitalism.”

The basic argument - the vanishing hand hypothesis - is as follows. Driven by increases in population and income and by the reduction of technological and legal barriers to trade, the Smithian process of the division of labor always tends to lead to finer specialization of function and increased coordination through markets, much as Allyn Young (1928) claimed long ago. But the components of that process - technology, organization, and institutions - change at different rates. p. 3

So where are we? The People, Ideas & Objects Preliminary Specification is designed to support innovative and dynamic markets that will enable the oil and gas industry to meet the surging demand for energy. But neither the surging demand nor the software exists. 12 million cars were sold in China last year. Probably the same number will be sold this year. The point is that the markets for energy are developing and the demand will grow. The question will be who will be the first to volunteer to keep their economy stagnant due to a lack of energy? And just as the markets for energy develop the software too needs to be developed.

As in Chandler, secular changes in relative prices attendant on "globalization" (driven by technology or politics) affect economic organization not only directly but also, and perhaps more importantly, indirectly through changes in technology. Production costs matter as much as transaction costs (Langlois and Foss 1999). Moreover, the kind of transaction costs that matter in history are often not those of the Williamson kind but those I have labeled dynamic transaction costs (Langlois 1992b). Costs of coordinating through markets may be high simply because existing markets - or more correctly, existing market-supporting institutions - are inadequate to the needs of new technology and of new profit opportunities. But when markets are given time and a larger extent, they tend to "catch up," and it starts to pay to delegate more and more activities rather than to direct them administratively within a corporate structure. p. 5

There will be significant changes made to the markets during the times we are developing the People, Ideas & Objects software. Changes that will need to be captured in the software. There is never a best time in which to approach these changes, however, now might be a good time.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

What is a Capability

In today’s post we try to answer the question what is a capability? It is in the “Dynamic Capabilities Interface” of the Research & Capabilities module that we are seeking to document the “what” and “how” of the operation the Joint Operating Committee will undertake. It is very important to note at this point that the tacit knowledge that makes up that operation can not be documented. It will however be invoked through the orders in the Job Order system. The depth of “knowledge, skills and experience” that is documented in the “Dynamic Capabilities Interface” includes the members of the Joint Operating Committee, their roles and responsibilities, and the field operations personnel. Detailing what and how they need to do their jobs in order to attain the objective of the operation. In a paper entitled “Transaction Costs in Real Time” Professor Langlois notes:

Although one can find versions of the idea in Smith, Marshall, and elsewhere, the modern discussion of the capabilities of organization probably begins with Edith Penrose (1959), who suggested viewing the firm as a 'pool of resources'. Among the writers who have used and developed this idea are G.B. Richardson (1972), Richard Nelson and Sidney Winter (1982), and David Teece (1980, 1982). To all these authors, the firm is a pool not of tangible but of intangible resources. Capabilities, in the end, are a matter of knowledge. Because of the nature of specialization and the limits to cognition, organizations as well as individuals are limited in what they know how to do effectively. Put the other way, organizations possess a pool of more-or-less embodied 'how to' knowledge useful for particular classes of activities. pp. 105 - 106.

That’s an effective way to state what it is that we are trying to achieve here. The “Dynamic Capabilities Interface” is a how-to database of capabilities the firm has for getting things done. Or;

'Routines,' write Nelson and Winter (1982, p. 124), 'are the skills of an organization.' p. 106

Now here is the point where we need to pay attention. Both figuratively and literally. In this discussion as well as in any and all oil and gas field operations. The ability to do any of these tasks on autopilot doesn’t exist. And the implications of the next quotation is far reaching.

Such tacit knowledge is fundamentally empirical: it is gained through imitation and repetition not through conscious analysis or explicit instruction. This certainly does not mean that humans are incapable of innovation; but it does mean that there are limits to what conscious attention can accomplish. It is only because much of life is a matter of tacit knowledge and unconscious rules that conscious attention can produce as much as it does. p. 106

It will need to be the explicit instruction contained within the “Dynamic Capabilities Interface” that guides the field operation. The conscious attention necessary to follow the program is a necessity.

In a metaphoric sense, at least, the capabilities or the organization are more than the sum (whatever that means) of the 'skill' of the firm's physical capital, there is also the matter of organization. How the firm is organized - how the routines of the humans and machines are linked together - is also part of a firm's capabilities. Indeed, 'skills, organization, and technology are intimately intertwined in a functioning routine, and it is difficult to say exactly where one aspect ends and another begins' (Nelson and Winter, 1982, p. 104). p. 106

One thing I can say for certain is that the technology begins with People, Ideas & Objects. By developing the Preliminary Specification the producers will be able to attain the level of innovativeness and operational control that is described here.

It has been a long and difficult process to detail what it is exactly that we are capturing in this interface. Capabilities are a difficult concept to quantify and qualify. Add to that difficulty is the need to keep innovation at the forefront of the producers and Joint Operating Committees capability, and the challenge ahead is well defined.

The Preliminary Specification provides the oil and gas investor with the business model for profitable exploration and production. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.